Inflation needs addressing
We believe the market’s inflation expectations over the long run underestimate the potential impact of $30 trillion in global fiscal and monetary stimulus and more inflation-tolerant central bank policies. Listed infrastructure offers investment characteristics that may help diversify portfolios for the current environment – including a history of equity-like returns, with greater resilience in down markets. This is largely a result of infrastructure business models focused on owning and operating essential assets that generate relatively predictable cash flows, often in regulated industries or markets with high barriers to entry.
Many infrastructure assets receive contractual adjustments to user fees that provide either fixed annual increases approximating inflation, or variable increases linked to consumer or producer price changes. Furthermore, certain subsectors, particularly in transportation, may stand to benefit from rising throughput in a strengthening economy. In addition, infrastructure can provide higher-than-market income and growing dividends, which could serve to further buffer the asset class from the impact of potentially higher rates.
If inflation continues to rise, we expect economically sensitive subsectors, such as transportation and midstream, to perform well. Subsectors that have pricing mechanisms that formally adjust for inflation, such as cell towers and utilities, should also demonstrate cash-flow resilience through the cycle.
Ride the renewables roll-out
The decarbonization movement is gaining momentum as the cost of wind and solar energy is now largely competitive with traditional fossil-based resources – even on an unsubsidised basis. As wind and solar generation has become more economically competitive through innovation, scale efficiencies and tax incentives, most US utilities have been actively building out renewable energy assets. We believe these investments, along with grid modernisation efforts, have the potential to drive significant growth opportunities for US electric utilities and renewable energy developers.
Infrastructure subsectors which may benefit from renewables growth include YieldCos, offshore wind developers and electric utilities. YieldCos are generally pure-play developers of large-scale wind and solar assets. Separately, offshore wind developers appear poised for robust growth over the next 20 years. Finally, electric utilities should end up being some of the largest owners of renewable assets. They will also need to upgrade the electric grid to integrate renewables – which could drive a very long runway of low-risk growth for the electric utility sector. Forward-thinking midstream energy companies are also increasingly incorporating renewables projects to boost their long-term growth profiles.
Data usage drives digital boom
Data centres and cell tower companies are generally benefiting from strong secular growth trends, as virtually every industry is moving to build out digital platforms and utilise 5G wireless technology. By 2026, global mobile data usage is estimated to quadruple, with over half of all traffic likely to be carried by 5G networks.
Rapid growth in data usage in the late-4G environment and the urgent demands of the approaching 5G era will require massive investments to expand communications infrastructure capacity over the next decade. This stands to directly benefit the cell tower industry. In addition, the spike in wireless and wired data traffic has the potential to drive sustained demand for data centres.
The US is unique in that the majority of cell towers are owned by independent tower operators, which benefit from the ability to lease out space on those towers to multiple tenants. An independent tower company that can accommodate multiple tenants can typically generate higher margins on those assets than wireless carriers that still own and are the sole user of their towers. Europe and many other parts of the world still operate largely with carrier-owned towers, but offer potential value creation through transitions and consolidation, as mobile network operators are re-evaluating the ownership structure of their tower assets.
